YIP-52: Make Strategist Skin in Game Partner for Make Benefit of Glorious Brain of Yearn

[lehnberg]

Authors

@banteg, @lehnberg, @milkyklim

Summary

• With 97.5% of the Vault’s performance fee going to the Yearn treasury, Strategists have barely any skin in the game–39x less than Yearn’s Treasury to be precise.
• Such a misaligned balance of interests does not make it attractive for Strategists to build on Yearn. This could turn into an existential threat to the protocol.
• This proposal sets Yearn and Strategists out to be equal partners in the success of a Vault, with each allocated an even share of the 20% performance fee:
  • Treasury allocation: 10%
  • Strategist: 10%

Background

What is Yearn’s competitive edge?

Yearn as an aggregator

Yearn is often referred to as a “Yield aggregator”, in the context of Ben Thompson’s Aggregation Theory[1].

Similar to Google for search, Facebook for social, Netflix for movies, Airbnb for holiday rentals, and Uber for rides, the idea is that Yearn should be the go-to source for users who want to earn the best and most predictable ROI on their DeFi investments.

Unlike these big tech companies however, there are some important differences in the case of Yearn as an aggregator:

• The code base is open source. If Yearn solves a hard problem, this means that others can now solve it too. The code base itself is not the competitive moat that it is for other aggregators. As we’ve seen it’s straightforward to create forks/clones and launch competitors to Yearn.
• There is no stickiness. Aggregators have different degrees of stickiness. The Facebook Social Graph is extremely hard to replicate and makes it very difficult for users to switch to a competitor. While it’s easy to switch to a Netflix competitor, they will miss out on exclusive original Netflix content so it comes at a cost. Uber’s driver pool and Airbnb’s housing stock is less unique and easier for its competitors to bootstrap or poach, but is still not trivial to replicate. Yearn on the other hand has no systemic stickiness. It does not even require canceling a subscription, or closing of an account. In the DeFi space, money flows to where it earns the best and most predictable returns.
• What’s on offer is ever changing and not easily commoditized. The aggregators turn “the hardest problem digitized” into a commodity. For Facebook it is news articles and social content. For Netflix it’s movies and tv-shows. In the case of Yearn, this would be yield-producing investment strategies. But these cannot be easily commoditized:
  • As soon as a strategy goes live, it can be replicated by competitors, thus affecting its performance.
  • As more capital flows into the strategy, it can become harder to realize the same opportunities, thus affecting its performance.
  • As time passes, a successful strategy will lose its alpha as the rest of the market adapts in response, thus affecting its performance.

Yearn’s Gingerbread Man strategy

When Snap filed to go public, they wrote in their S-1 filing:

In a world where anyone can distribute products instantly and provide them for free, the best way to compete is by innovating to create the most engaging products. That’s because it’s difficult to use distribution or cost as a competitive advantage—new software is available to users immediately, and for free. We believe this means that our industry favors companies that innovate, because people will use their products.

This triggered the same Ben Thompson to quip that Snap was pursuing a Gingerbread Man strategy[2]:

Run, run, run as fast as you can.
You’ll never catch me, I’m the gingerbread man.

This applies well to describe Yearn and the advantage it has over its competition. It’s not the total value locked. It’s not the APY returns. It’s the ability to ship more innovating products, that are more secure and better performant than anything else on the market. This at a faster pace than the competition can keep up with and try to imitate.

Yearn’s edge is the collective brain power it attracts and can retain building for it

If Yearn’s business is aggregating yield-bearing strategies, its Strategy creators are the equivalent of Uber’s drivers. Strategy creators are however very different from Uber drivers. They have much more unique skill sets, making them harder to replace, and more important to retain.

A Strategist’s choices

Someone who develops an investment strategy that results in a positive yield has the following choices today:

1. Work for Yearn. Partner up, work with protocol devs to integrate Strategy in a vault, hope for launch with a large influx of capital, be compensated as part of the performance.
2. Create competing project or work for a competitor. Either launch a competing project to Yearn, or work for an existing competitor, in the hopes of earning more fees.
3. One man wolf pack it. Deploy strategy solo, perhaps raising funds from friends and family, and keep all the fees.

In order for Yearn to remain competitive over the long term, the best and the brightest strategists must consistently choose to work with Yearn. This an existential question, necessary in order to ensure the long term sustainability of the protocol.

How are strategists rewarded today?

The next version of Yearn vaults will launch with a two-pronged fee structure[3]:

1. A 2% management fee levied on AUM that goes to the Treasury;
2. A 20% performance fee levied on returns from the vault, which is split as follows:
   • 19.5% to the Treasury
   • 0.5% to the Strategy creator

Strategists are expected to cover their own development, testing, gas, and monitoring costs. Under the current allocation, Strategists are not breaking even at times.[4]

Motivation

Why not share the management fee?

• The protocol requires predictable income. There are a lot of constant costs on the protocol side. Operations, Development, maintenance, and R&D. These require a stable source of funding and should not be affected by Strategists.
• Survival of the fittest. Strategists should “eat what they kill”, rewarding only the most ambitious and best performing, filtering out the rest.

Why split the fee equally between Treasury and Strategists?

• Establishes a partnership. The message is clear: Yearn and Strategists are in this together, and it’s a symbiotic relationship, where both are held accountable and are equally responsible for success.
• Acquisition. Creates success stories of high earning Strategists that will make it more aspirational and attractive for others to become Strategists.
• Retention. Strategists with a lot of skin in the game will work and further Yearn as opposed to a competitor.

Future possibilities

Tiered fee system. As the Strategy creation space matures, there could be justification to distinguish between different qualities of strategies, creating a tiered system that rewards a different share of the performance fee based on the novelty and the sophistication of the strategy, as proposed in [5]. At this stage, it’s recommended to keep a simple structure that is easy to reason about and for Strategists to understand the appeal of. This should be revisited in the future when needed.

Comparing allocations

Drawing from the backtesting data produced in [6], below is the Vaults V2 fee model applied to the yUSD vault, showing the difference in earnings between Strategists and Yearn treasury between allocation models.

Previous allocation

Proposed allocation

Comments

• The previous allocation to Strategists is disproportionately small compared to the value created by them.
• In the proposed allocation, the Yearn treasury receives 64% of all fees as it is paid the entirety of the management fee.
• The Strategist now earns a sizable reward that is entirely based on performance.

Specification

New performance fee structure

• 20% performance fee
  • 10% allocated to Treasury
  • 10% allocated to the Strategist

The Strategist is expected to pay for all expenses incurred, including those of development, testing, gas, monitoring, and operation.

Vote

For: Accept proposal.

Against: Reject proposal.

Poll: Snapshot

Note: 3-days voting poll is binding (live from Nov 9 - Nov 12).

References

1. Aggregation Theory – Stratechery by Ben Thompson
2. Snap’s Apple Strategy – Stratechery by Ben Thompson
3. https://snapshot.page/#/yearn/proposal/QmSaYHR97LDMDvg9xeTfdNZw6aqL9njxBKM6JVFtCYxKvB
4. [Proposal] Increase Strategist Rewards - #8 by banteg
5. [Proposal] Increase Strategist Rewards - #10 by fubuloubu
6. http://gov.yearn.fi/t/restructure-fees-and-align-incentives/

[SamPriestley]

Yasss. Very much needed. Voting yes

[andy8052]

As an active v2 strategy writer, this change would make it worth while to pursue this full time. I won’t begin to act as though I know what is best for the whole yearn system, but a 0.5% fee is not enough for me to drop everything and write strategies 24/7. 10% certainly is and would have me very excited about it/looking to evangelize to others.

[laur_science]

Maybe it’s best to keep running with the same split for strategists for at least three more months from the moment when v2 vaults are audited and in use, and see how it goes. Why hurry and make such a drastic change…

I believe that if this YIP goes through, the $YFI price will suffer. And if strategists will be payed in $YFI, there’s a disadvantage in that respect.

[fubuloubu]

From a bird’s eye view, this proposal is pivotal to yearn’s future. Reading discussions like this one really makes it clear that properly aligning incentives for yearn creates a continuous investment that leverages yearn’s first mover advantage (as well as it’s numerous other properties) and turns it into an unstoppable force. This proposal does that.

I’ve heard several of our community Strategists comment that this proposal really excites them to continue building on Yearn. It may seem like an extreme position to take but the short-term pain of realigning the incentives here creates long-term advantages for Yearn. Get this right, and you ensure that Yearn’s network effect in the DeFi ecosystem only grows, attracting the brightest minds in the space to create value for yearn’s users and it’s community.

As a comunity member and tokenholder myself, my only ask here is that people think long-term, and not suffer from “sticker-shock” from these proposed changes.

[fubuloubu]

@laur_science

if strategists will be payed in $YFI, there’s a disadvantage in that respect.

As a note, the strategists would be paid their % in Vault shares for the Vault they created the Strategy for. They would not be paid in YFI directly (so there is no sell pressure there). This is true with or without this proposal.

[laur_science]

Thinking long term, if DeFi and Yearn are successful, a 5% for strategists from the performance fee would be a decent monthly percentage from hundreds of millions.

[undefinedza]

I fully support this proposal.

Creating strong incentives for the smartest strategists and developers to contribute to the protocol is our moat. This flywheel is the engine of growth for Yearn AUM and therefore YFI.

Higher rewards for contributors => More active strategies that are first to market => Higher returns on AUM => More AUM => (repeat) Higher rewards for contributors

For YFI Holders: getting an equal split of fee revenues on a MUCH LARGER stream of revenues is a better deal than getting a larger cut of a smaller stream that is eroded by competitors. Let’s make decisions for the long term and build our moat.

[banteg]

The Strategists group has been shipping like crazy lately, multiple people have said they will work full time for Yearn if we figure the right incentives for them. These guys are the real asset of Yearn, they’ll grow us the biggest pie.

[fubuloubu]

I think lowering the percentages can happen after we grow a sufficiently large amount in the future. Also keep in mind that this is 10% of what a strategy returns. A vault can have 5-10+ strategies, so that 10% is really being split N ways based on the strategies individual returns, we’re not just giving millions to one person here haha.

However, we need to start strong by aiming higher at first.

[laur_science]

Those are some strong points @fubuloubu, and thanks for the explanation.

As a counterpoint, I’d mention that if we are successful in building vaults that are greatly optimized, documented, and standardized, then writing strategies should become easy for a lot more of the people who have DeFi knowledge. I’d rather wait for us to have such vaults first, and then if the current strategy fee proves insufficient after at least three months, then increase it.

[laur_science]

Another counter point: if a $LINK vault pays in $LINK, then the $LINK community is incentivized to write strategies for that vault. We might have more incentivized strategists that we realize.

[milkyklim]

Another counter point: if a $LINK vault pays in $LINK, then the $LINK community is incentivized to write strategies for that vault. We might have more incentivized strategists that we realize.

Where are all these devs now when we need them? $LINK was underwater for a while, however, no attempt from marines to help there.

As a counterpoint, I’d mention that if we are successful in building vaults that are greatly optimized, documented, and standardized

Who would create those vaults if strategists are not incentivized?

I encourage you to read proposal once again cause your counterarguments are addressed in the text.

Simply stated – no money, no honey.

[YFI-Cent]

Strongly in favor. Strategists are an important competitive moat. They need to be properly incentivized. I am voting for. If you are thinking gee 10% is kind of high, I think it should be lower and because of that you vote ‘no’ you are being incredibly short sighted here. Let’s pass this

[fubuloubu]

@laur_science

then writing strategies should become easy for a lot more of the people who have DeFi knowledge.

While we definitely are aiming to make the coding/integration portion of working with the Vaults as easy as possible, the specialized knowledge and intuition, as well as the shear depth of market knowledge required, makes it unlikely in practice that you could ever make creating a Strategy as easy as point and click to earn thousands of dollars in fees. It may seem this way now, but that is because we are early in a DeFi bull market, and money is flowing more easily. We want to leverage this opportunity to create that insurmountable network effect for yearn when the market inevitably turns bearish again, and we need more creative strategists to ensure our products remain profitable. Food for thought

@laur_science

Another counter point: if a $LINK vault pays in $LINK, then the $LINK community is incentivized to write strategies for that vault. We might have more incentivized strategists that we realize.

I definitely envision that other communities will want to collaborate and may offer their own incentives as well, either outright or as an upfront trade for future earnings. Keep in mind that this split is just a suggestion, it will become the sticky default in newly-deployed Vaults. We can modify these numbers at any time, as well as on a case-by-case basis.

[MFP]

I thought vaults are created by the dev team.

Do you envision strategists who are not on the dev team will donate their time to work on projects beyond their strategies, such as Yearn’s vault infrastructure, UI, governance, etc.?

[doug]

Echo this, the proposal and comments are based on current strategists that are onboard right now building for v2.

Proposal is based on current active strategists building, not on these “future” strategists that don’t exist right now.

The feedback in this thread from @andy8052, @SamPriestley @fubuloubu @banteg and others comes from the actual developers tackling these problems at the moment, not in a hypothetical future.

Also, as easier as the process can get to deploy strategies in v2, building a good strategy that has good returns is not by any stretch simple (trying to come up with even one good strat and failing for weeks, and i am an experienced developer in DeFI and ethereum), the entry level bar is high to get into Ethereum + DeFI.

If this rare talent has stepped up to help yearn, we as a community should backed them up.

[MFP]

From the proposal:

In order for Yearn to remain competitive over the long term, the best and the brightest strategists must consistently choose to work with Yearn.

What prevents strategists from concurrently working with both Yearn and competing platforms? If strategists are free to concurrently work with multiple platforms, how will high fees from Yearn give it a competitive advantage?

[banteg]

Yearn has interesting hooks into other protocols which others don’t have and which are hard to obtain.